Liberal and progressive online journals over the past week or so have been buzzing — rightfully so — about the recent revelation that General Electric paid no corporate income tax at all in 2010. According to a recent GAO report, about a quarter of the largest American corporations paid no corporate income tax in 2005.

But that’s really just the way the system is set up. If you think about it, the corporate income tax really isn’t all that progressive. Just about all the tax loopholes and other tricks for avoiding taxation tend to favor the big boys at the expense of everyone else. Perhaps the single best way to avoid taxes is for transnationals to shuffle income to subsidiaries in the lowest-taxed jurisdictions, so transnationals already have a leg up on the smaller companies that operate primarily in the United States. And if you look at the largest tax deductions and tax credits, they go overwhelmingly to companies that are capital-intensive (the writeoff for depreciation), high tech (the R&D tax credit), or heavily involved in mergers and acquisitions (the deduction for interest on corporate debt).

What’s more, the largest corporations are least likely to suffer for whatever corporate income taxes they do pay, because they tend to be in oligopoly industries that practice tacit pricing collusion through the “price leader” system. This doesn’t require any conspiracies or secret meetings in smoke-filled rooms. When three, four or five large firms control more than half the market in a given industry, they tend to follow the pricing practices of the dominant firm. So prices in an oligopoly market are “stickier.” The practical effect is that the big firms in an oligopoly industry are able to use administered pricing based on a markup from their costs — including the corporate income tax — and pass them on to the customers. That’s essentially the same thing a regulated public utility does.

So the largest corporations are more likely to be able to just pass their taxes on to the consumer as a markup, and set themselves an after-tax profit over and above those expenses. Smaller corporations in the competitive sector, on the other hand, are price-takers rather than price-makers. This means that the corporate income tax on the large companies is mostly paid by the customer as part of the markup, whereas the smaller firms take more of a hit on their profits.

In other words, the “progressive” agenda of closing corporate income tax loopholes and raising rates on the big boys will have the unintended consequence of raising prices on the consumer without affecting corporate profits.

So what’s the solution? Instead of taxing their profits higher, we should be eliminating all the interventions by which the state makes their profits so large in the first place.

That means abolishing copyrights and patents, state-enforced monopolies which are the single biggest source of profit in the transnational corporate economy. The biggest source of profit is royalties on information and entertainment whose marginal cost of production is zero. If it wasn’t for “intellectual property,” Microsoft Office would cost about as much as my Open Office CD (I got it for ten bucks). What’s more, trademarks and patents are the main legal support for what Naomi Klein calls the “Nike model,” by which all actual manufacturing is outsourced to independent job shops in the Third World and the corporate headquarters simply retains control of production through its control of IP, finance and marketing. Patents and trademarks are the reason for the brand-name markup of hundreds or thousands of percent between the actual cost of making those sneakers in the Chinese sweatshop, and the $200 or so the Western consumer pays at Target.

It also means abolishing government subsidies and regulatory cartels of all kinds. Regulatory cartels, in particular, have played a huge role in the formation of stable oligopoly markets and the 25% or so markup the Nader Group found in industries with the smallest number of firms.

So once again, this illustrates the same general principle that we keep coming back to: Instead of regulating and taxing the effects of government-enforced monopoly, we instead need to just get rid of the monopoly.

19 comments

“The biggest source of profit is royalties on information and entertainment whose marginal cost of production is zero.”

Except, of course, for the decades of work it took to create Microsoft Office, or Dark Side of the Moon, or this blog. This entire concept that royalties and IP are somehow inherently “bad” flies, to me, in the face of everything we know to be common sense- that is, if you do you the work, you get paid. Otherwise, I’ll simply dub Dark Side, put my name on it, and slap it in Target and watch the money roll in.

Or, I’ll take this blog post, put my name on it, and publish it elsewhere, where I profit.

James M, you conflate IP issues with plagiarism. You really ought to separate those. The attack on patent and copyright is an attack on government-backed control of the use of ideas. It's not a defense of people who represent other people's work as their own by slapping their names on it. People have plenty of voluntarist ways to sanction someone who pretends he has written something that he did not write.
My recent post First Define Your Terms

"Otherwise, I'll simply dub Dark Side, put my name on it, and slap it in Target and watch the money roll in. "

With that particular example, we'd all know you stole it, and dub you a dick. You assume people can't act like responsible adults without being forced to or put on ridiculous, leashes made of "good intentions".

The biggest source of profit is the ability to hire labor for less than its productivity and the biggest tax subsidy is to shift taxation to employees rather than to the employer, who collects it anyway. The business income tax should be abolished in its current form and shifted to a busienss receipts tax or VAT.

James: Putting your name on my post would be fraud. But everything published here is licensed under Creative Commons for unlimited reproduction and distribution. And I don't enforce copyrights on anything I write. You're fully entitled to get paid for anything you do if you can find someone willing to buy it. If you want to put some configuration of words in a dead tree book or on a CD, it's yours to sell to anyone who wants to pay for it, for whatever price the two of you negotiate. But your right to get paid doesn't extent to receiving a monopoly from the state to reproduce a particular pattern of information. And you seem to be totally unaware of all the buiness models based on using free content as a way of selling other scarce goods (like using free Linux software to sell customization and support services, using free mp3s to sell concert tickets, etc.).

I agree with all your proposals, Kevin, but I would add one-abolition of corporate personhood. This is a huge subsidy, perhaps greatest among them all. Regardless of where it stands, this allows shareholders to have blanket immunity from all liability incurred. The consequences for corporate responsibility are clear.
For a more humorous take, see my recent post: http://gazinglongintoanabyss.blogspot.com/2011/04…

James M. wrote: “Except, of course, for the decades of work it took to create Microsoft Office, or Dark Side of the Moon, or this blog. This entire concept that royalties and IP are somehow inherently “bad” flies, to me, in the face of everything we know to be common sense- that is, if you do you the work, you get paid. Otherwise, I’ll simply dub Dark Side, put my name on it, and slap it in Target and watch the money roll in.

Stephan Kinsella, in the context of copyright, addressed a similar “argument” asserted by the author J. Neil Shulman. Kinsella wrote: “Finally, you [i.e., Shulman] say , “If you think a novel isn’t scarce, write one people beg to read.” Do you not see that this is equivocation? You should realize we use the word scarcity in its technical economic sense in our property arguments to mean rivalrous. You are using it here in the more colloquial sense to mean not-abundant, rare, or hard to come by. If you just use “rivalrous” instead, see how absurd your argument looks: “If you think a novel isn’t rivalrous, write one people beg to read.” See–this makes no sense. It’s not even an argument.” See: http://c4sif.org/2011/01/query-for-schulman-on-pa…

The corporate tax should be abolished, since it's whole purpose is to deceive a largely ignorant public about the burden of taxation they bear, and enable the expansion of the state. All taxes should be payed directly by individuals, and clearly elucidated without loopholes or other "incentives", since they ultimately bear the final cost, whether it be through higher prices or decreased output.

Of course, you'll notice the so-called "anarchists" on this blog give themselves away when they support the even more complex VAT, the only conceivable purpose for which is to further conceal the tax real burden from public scrutiny. More deceit. But what should I expect from "free-market anti-capitalists" for whom dictatorship of the proletariat is the endgame? Good luck on your false-flag operation, moles.

I agree with some of this comment. I oppose all taxation and state-created fictitious persons. But the corporate tax is just a shrouded tax on consumers, workers, and shareholders–and it's never clear exactly how it fall. Individual taxation would at least be open for all to see, making it easier to resist. The VAT is especially evil because it is so hidden from consumers.

Santa Claus should really check his list twice and make sure all the naughty and nice children get what they deserve.
Or should the children wake up and realize that Santa Claus is a myth designed to assist with controlling their behavior, because teaching children how to behave based on rational self-interest is too much trouble?

Few anarchists would object to the state’s coffers being emptied and redistributed back to the masses. But if most corporations are just extensions of the state (or at least rely on state power for their monopoly), why not extend this logic to apply to corporations as well? Granted, the government collecting taxation is hardly an ideal way to redistribute the wealth back, seeing how most of the state’s money goes to things like bombers and tanks (and also how you mentioned Kevin that the corporations tend to just pass the bill down to the public). But as an anarchist who is seeking some form of justice, I would rather see GE’s profits go into state welfare programs than into the CEO’s pocketbooks. Just like violence can be legitimized for defense, taxation can be legitimized to correct past wrongs (which even Proudon recognized).

"The decades of work it took to create Microsoft Office" … interesting phrasing. To eliminate the subject, use the passive voice. Making this argument is a lot easier if we forget the many nameless underpaid laborers who actually performed all that work, and – for all the pro-entrepreneur champions out there (though probably not HERE) – the tiny companies who came up with this piece or that and then sold out for a song rather than be driven out of business or have their work stolen.

You gotta wonder what better options we might have available today had those workers and tiny startups been able to apply their talents and pursue their ideas to their pinnacle. Something better than Microsoft Office, I'm sure.

This is just one example. Imagine what the world might be like if someone stormed (okay, nowadays I should say "leaked") the entire Patent Office library.

I believe Patents are “in the Constitution” …. to the extent that this matters. See Albert Jay Nock, Chapter 5 on Jefferson, on the real purpose and history of the Constitution. Also see far right wing Gary North on John Hancock’s Big Toe, for the politics behind the Constitution. A big deal was putting down Shays’ Rebellion, which was tax rebels against govt bailouts for financial speculators on the backs of real producers, e.g. farmers. Deja vu.

Anyhow, a *reasonable* conception for Patents would be a limited time to recoup R & D costs, assuming that much R & D was not paid for by the Pentagon (etc) in the first place, or NIH in the case of medicine and Pharma. That would mean the prototypical “inventor” — like Austrian’s prototypical “the Businessman” — would be rewarded higher profits to pay for the time put into inventing. With the current status, especially sw, as Kevin pointed out elsewhere, they can not only patent inventions, but the pure IDEAS behind the inventions, like the existence of a “problem” being addressed, so anyone attempting to address the same problem at a higher level or different way may be sued for patent infringement.

This website is called Center for a Stateless Society (C4SS). Why are commenters here writing about the benefits of different forms of taxation and/or making arguments about what the constitution may or may not prescribe?